APR 2022 UPDATE: This article has been updated to reflect the 2022-2023 tax rates on dividends.
This isn’t an easy question to answer because it is so dependent on your circumstances. But there are scenarios when it might make sense, and this is what we have explored below.
The Benefits of using a Limited Company
Personal income tax rates are currently set at 40% (higher rate) and 45% (additional rate). This is substantially higher than corporation tax which stands at 19% of profit for the tax year. Restrictions on mortgage interest relief and relief on finance costs won’t apply either if you are paying corporation tax.
The financial implications of moving a property
Let’s consider the practical and financial implications of moving property to a limited company.
To transfer just one property to a limited company, you will essentially need to sell the property to that company. If the property was worth £350,000, you would be subject to the following costs:
- Stamp Duty Land Tax (SDLT) at the higher rate.
- Capital Gains Tax (CGT). Charged at residential property rate of 18% if your total annual income is within the basic rate band, and 28% if your income falls in the higher rate band.
- Mortgage finance charges associated with the new company mortgage.
- Early repayment charges (if applicable) on the current mortgage.
You will no longer be eligible for a number of tax breaks (for example incorporation relief and entrepreneurs’ relief) as property is viewed as an investment rather than a business by HMRC.
With regards to buy-to-let mortgages, you should also bear in mind, that there is a more limited selection when compared to residential mortgages, and you may have to take a more expensive deal.
If you plan to take dividends from your company, you should also allow for this at the applicable rates. Currently dividends withdrawn within the basic rate tax band are charged at 8.75% and this increases to 33.75% for the higher rate tax band, and 39.35% for the additional tax rate band.
One option to address the dividend issue, should you sell the property to your company at market rate, is to create a substantial Directors Loan Account. This can be repaid to you tax free over a period of years. The size of this loan account will be smaller if the majority of the property is mortgaged.
The final consideration to make when transferring property to a limited company, is the additional administration needed to run the company. Quite quickly you could be faced with some major costs and commitments (including audit costs, tax inspections etc).
Whether the value gained in moving property to a limited company, outweighs these additional costs and commitments is generally dependent on the value of your portfolio and how long you plan to retain it.
As a general rule, if you hold less than 10 Buy-To-Let properties as investments (as opposed to running a lettings business), the cost implications of transferring these properties to a limited company are likely to exceed the benefits.
Possibilities for the Future
The use of a limited company is not a completely lost cause, however. There are circumstances in which it may be worthwhile making new property purchases through a limited company. For example, if you do not need to extract any income from the company in the short term, or if you plan to establish a large portfolio of properties as your main form of employment, then this approach might be advantageous.
As you can see, there are opportunities and challenges to be considered, and it all depends in individual circumstances and future ambitions. With these factors in mind, an experienced personal tax manager can review your situation and advise on the most tax efficient strategy to deliver optimal financial returns.
For a further details of how we can support you with your personal or business tax planning, please get in touch with the Kingston Burrowes team on 020 3627 4321 who will be happy to discuss your individual situation.